Monday, September 27, 2010

In the course of economic growth theory, the impact of religion on economic growth and GDP per capita has been largely neglected by the mainstream economic theory. Basically, there have been two major conceptual forces behind the demonstration of the effect of religiousness on economic growth. First, traditional theoretical approach to the analysis of economic growth embodied in the Solow approach emphasized the role of capital accumulation and technological progress in the growth of total factor productivity where the technological progress accounted for the unexplained and exogenous feature that drove the growth of total factor productivity.

Early analyses of economic growth and its main determinants heavily neglected the effect of institutional variables on economic growth. Second, the theoretical framework of economic growth usually follows the empirical evidence on the existence of postulated hypotheses related to the economic growth. Primarily, the effect of religion and other institutional features on economic growth has been displaced to the lack of empirical estimation techniques that could account and control for the effect of the institutional phenomena on the course of economic growth.

The best lucrative and empirically consistent analysis of economic growth and its determinants had been documented by Robert Barro and Xavier Sala-i-Martin. In 2004, Robert Barro published Economic Growth Across Countries. In the explanatory framework, the author included several institutional variables and examined its effect on 10-year economic growth interval in a cross section of 86 countries over 1965-1975, 1975-1985 and 1985-1995 time periods. For a given set of institutional control variables, the rule of law exerted a strong, positive and statistically significant effect on growth. The effect of democracy, the second institutional control variable, was estimated by a single coefficient and its squared term to account for a possible movement of the effect of the level of democracy.

The magnitude of both coefficients was statistically significant. The sign of the squared term was negative suggesting for a typical inverted-U effect of democracy on economic growth. In the meaning of the economic theory, the estimated coefficients suggested that the adoption of democratic institutions and policies in the initial stage of GDP per capita boosts economic growth, particularly by the institutions such as the rule of law, electoral representation, and multiparty political system as well as by the constitutional protection of civil liberties.

However, as countries depart from the initial level of GDP per capita, the political pressure from electoral representation tends to enforce egalitarian policies that negatively effect economic growth, particularly by the fiscal redistribution of income to mitigate income inequality. Consequently, the effect of democratic institutions tends to diminish and, as the curve bends, the predictive effect of constitutional democracy is negative, thereby exerting a negative effect on economic growth. However, the hypothetical relationship between democracy and economic growth is dubious, if not intriguing. In fact, neoclassical growth theories suggest that the rate of economic growth tends to diminish alongside the expansion of the capital stock and productive capacity of the national economy. The hypothesized theoretical assertion postulates that the non-linear, inverted-U effect of democratic institutions on economic growth is overestimated.

In 2003, Robert Barro and Rachel M. McCleary wrote a seminal contribution (link) to the theory and empirics of the relationship between religion and economic growth. Even though in The Protestant Ethics, Max Weber argued that the religious practices and beliefs have had important implications for economic development, the economists paid little or no attention to the role of religiousness as a cultural measure on economic growth. Arguably, the most difficult inferential problem in economic theory is to capture the direction of causality in non-experimental data which indistinguishably confuses the empirical inference from sample estimates. The theoretical relationship between the religion and economic growth is nonetheless a daunting task of the economic theory.

Across the world, there is a whole spectrum of religious diversity in the interplay between religion and economic development. Some countries, such as the United States have been largely influenced by the Enlightenment thought, penned in Thomas Jefferson’s 1779 The Virginia Act for Establishing Religious Freedom, on religious freedom as the principle of freedom from religious oppression. On the other hand, countries in Northern and some parts of the Continental Europe largely adopted Protestantism as the religious establishment while Southern and Central European countries experienced a strong and coercive influence of Roman Catholicism. Hence, the historical bond of nations in the Middle East and North Africa to the Islamic religion accounts for a significant share of the world population and a representative estimate of the effect of Islam on economic growth.

In addition, many political regimes, particularly in China, Soviet Union and Cuba, have attempted to suppress the religious freedom and, hence, establish a system that officially prohibited and punished the religious practice. Surprisingly, countries in Northern Europe such as Norway, Finland and Iceland have established an official religion that is effectively articled in the constitution. Given the vast difference in the distribution of GDP per capita across countries, the assessment of the relationship between the religion and economic growth is not a triviality per se.

Robert Barro and Rachel M. McCleary constructed a broad cross-country dataset which included national account variables and an array of other political, economic and institutional indicators in a cross section of over 100 countries since 1960. The predicted theoretical expectations postulate whether the religion fosters religious beliefs that influence individual cultural characteristics such as ethics, work and honesty. The authors estimated both the effect of different explanatory variables on religious outcomes such as monthly church attendance, the belief in heaven and the belief in hell.

The estimated coefficients suggest that monthly church attendance is strongly affected by urbanization rate and a set of dichotomous religious variables. In particular, a one percentage point increase in the urbanization rate decreases monthly church attendance rate by 1.49 percentage points, holding all other factors constant. In addition, a 1 percentage point increase in religious pluralism fosters the monthly church attendance rate by 1.35 percentage points, ceteris paribus, while the increase in the measure of the regulation of religion by 1 percentage point decreases the church attendance rate by 0.64 percentage point. Hence, the church attendance rate in countries with official state religion, on average, increases the religious participation by 0.87 percent more compared to countries with the absence of state religion, ceteris paribus. The belief in heaven and hell, on the other hand, is positively correlated with state religion and religious pluralism, Muslim religious faction and other religious factions. The belief in heaven and hell is significantly negatively correlated with urbanization rate, communist regimes, Orthodox religion, Hindu religion and Protestant religion. Barro and McCleary regressed growth rates of real GDP per capita on variables of monthly church attendance rate, belief in heaven, belief in hell and dichotomous (dummy) religious variables representing the share of religion in the countries observed. The table below reports dummy coefficients of each religion relative to the Roman Catholicism. The sign of the coefficient is negative suggesting the increase in the share of each religion (see table) decreases the growth rate of real GDP per capita by less than by the anticipated increase in the share of Roman Catholic religion.

The p-value for religion shares in the regression specification is about 0.001, suggesting that the hypothetical zero simultaneous effect of the explanatory dummy variables of religious share is easily rejected at 0.1 percent level of statistical significance. The estimate suggests that religious shares influence the growth rate of real GDP per capita. Interestingly, sample estimates of regression coefficients suggest that monthly church attendance is significantly negatively related to the GDP growth rate. The estimated coefficient suggests that higher church attendance will, on average, lead to significantly lower growth rate of real GDP per capita and, hence, a lower growth of the standard of living. On the other hand, the sample estimates of growth regression coefficients suggest that the extent of belief in heaven and hell is positively related to economic growth. Thus, the empirical evidence from the panel of over 100 countries since 1960 suggests that the belief in heaven and hell encourage ethical behavior and honesty and thereby simultaneously increases the growth rate of real GDP per capita. The reported p-value for church attendance and beliefs is 0.000, suggesting the rejection of null hypothesis on a simultaneous zero effect of church attendance and beliefs in hell and heaven on the growth rate of real GDP per capita, and a strong influence of religious factors on the distribution of economic growth across countries since 1960.

Regarding the true importance of religious freedom, not oppression, on the emergence of order alongside the abstract rules and the pursuit of individual liberty, Friedrich August von Hayek wrote in The Constitution of Liberty: “It should be remembered that, so far as men’s actions toward other persons are concerned, freedom can never mean more that they are restricted only by the general rules. Since there is no kind of action that may not interfere with another person’s protected sphere, neither speech, nor the press, nor the exercise of religion can be completely free. In all these fields … freedom does mean and can mean only that what we may do is not dependent on the approval of any person or authority and is limited only by the same abstract rules that apply equally to all.”

In the microeconomic perspective, religious market is highly oligopolistic, especially in Europe where government subsidies to large religious groups discourage the entry of competitive religions in the market. Therefore, in strongly Catholic countries, such as Italy and Spain, Roman Catholic church firmly resembles the behavioral pattern of a dominant firm, facing price inelastic demand and price elastic supply. Subsidies to churches do not quite differ from subsidies to corporations and enterprises - the net effect are lower marginal costs, increasing the total producer surplus of the church and increasing the deadweight loss to the consumers of religious services. A cautionary approach would require not only the precise modeling of the religious market upon the theoretical assumptions but also the contestable empirical evidence on the existence of the Catholic church as a dominant firm in highly oligopolistic religious market.

Incidentally, the empirical evidence suggests strongly negative effect of the share of Roman Catholic religion on the long-run growth rate of real GDP per capita. Nonetheless, religion is an important determinant of economic growth. However, the evidence from the second half of the last century suggests that the prosperity and wealth of nations is greater if people allocate fewer resources to the exercise of religious activities.

Thursday, September 23, 2010

The OECD recently published the international comparison of the gap in employment rates between university graduates and workers with secondary education or less (link). There is no single exception to the fact that the employment rate is the highest in the group of individuals with college and university degree. Nonetheless, the comparison of the variation in employment rate in the cross section of OECD countries is very interesting.

Among the OECD countries (link), Iceland enjoys the highest employment rate (94.7 percent) of those with college or university degree followed by Switzerland (93.9 percent), Norway (92 percent) and Denmark (91.4 percent). The lowest employment rate for university graduates in 2008 was in Turkey (81.4 percent), Italy (86.5 percent), Israel (86.6 percent) and Greece (87.2 percent). In contrast, the employment rate for those below the secondary education is the lowest in Slovakia (39 percent), Hungary (47.5 percent), Poland (55 percent) and Czech Republic (57.4 percent).

The persistence of high unemployment rate for those below the secondary education degree is a broad outline of the findings from the course of labor economics. The human capital, defined as the stock of years of education per capita, is highly positively correlated with career earnings. The evolution of human capital across the countries has been a subject of debate on economic growth. The empirical study by Robert Barro and Jong-Wha Lee (link) has shown that, for instance, upper secondary school attendence by males has a significant long-term impact on the economic growth. The level of education, sustained by the years of schooling, is not a sole determinant of economic growth in the international perspective. Although, the economic growth is strongly positively correlated with the average years of schooling, the relationship is less powerful considering different parameters of the educational attainment. In the Barro-Lee dataset (link), there is a significant variation between the share of female population that enrolled in a tertiary education and the share of female that completed the tertiary degree. The difference is significant not only in the cross section but also in the country-based time series.

By far the highest tertiary degree completion rate for female has been present in Australia, Canada, Ireland, New Zealand and the United States. Among other countries, the completion rate of Iceland and the Netherlands has been significantly higher compared to the countries of the Continental and Mediterranean Europe. The rate of return to an additional year of schooling significantly differed across countries and across the level of education. For instance, Barro and Lee estimated that the rate of return is the highest at the tertiary level (17.9 percent per annum) compared to the secondary level (10 percent) while the rate of return from an additional year of schooling at the primary level is statistically insignificant from zero. The picture shows the regional variation in the average rate of return from an additional year of schooling.

The creation of human capital is essential to higher economic growth. Ultimately, the investment in human capital is the essential means of higher standard of living in poor countries. An interesting theoretical question is what could account for a divergence across the countries? Considering the relevant economic theory as well as scholarly contributions to the theory and empirics of economic growth, there are several factors that explain the significance of divergence in the rate of return from an additional year of education.

First, the impact of behavioral patterns on education and labor market decisions explains a pretty large part of the difference between the effect of education and labor market structure on the rate of return from schooling. Although the field of behavioral economics (link) is still a largely evolving discipline within the economics, the existing empirical studies of the effects of institutional variables on education outcome try to capture these effects by different proxies such as the estimates of political freedom, the rule of law and civil liberties. The changes in the return to education may be related to these factors since the relative worth of education in regions such as Sub-Saharan Africa and Latin America may incur high opportunity cost given the payoff from predatory behavior or working in the informal sector of the economy.

Second, general and firm-specific human capital investment, the increase in college premium and the enormous increase in female labor force participation help explain high rate of return from an additional year of schooling in advanced countries and East Asia. In particular, East Asian tigers were able to sustain high economic growth rates partly because of well-trained and educated labor force able to use the modern technologies. The resulting outcome of the Asian economic miracles has been a steady growth in output per worker and a gradual convergence of wage rates in South Korea and Japan to the level of U.S. According to Kevin Murphy and Finis Welch (link), the premium of getting a college education in the U.S in 1980s was 67 percent. The growth in college and university attendence rates is largely explained by the robust increase in tertiary education premium.

And third, greater labor force participation of women has also led to higher rates of college and university attendence. In spite the persistent male-female pay gap, women have experienced a tremendous increase in lifetime earnings as a consequence of higher rates of college and university attendence. The persistence of the male-female pay gap can be explained by the rewards to education rather than by inherent gender bias. The U.S. Census published the relevant data (link) on the distribution of female earnings. In 2003, the female earnings of high school graduates in the 25-34 age thresold represented 78 percent of average male earnings. The earnings of the same female age thresold with bachelor's degree represented 89 percent of male earnings and 71 percent for those female with master's degree. What accounts for the gender earnings gap across the levels of age and education is the asymmetric self-selection that led to dispersed gender distribution of relative earnings. Men usually self-select into the areas of work requiring a significant amount of risk-taking and rather uncertain payoffs while the female labor market pattern is inclined towards less risk-taking and greater certainty regarding the stability of lifetime earnings.

The data by the U.S. Bureau of Labor Statistics (link) published in 2003, showed that female-to-male earnings ratio in high-paying jobs is the lowest in the field of chief executives where female earnings represented 80 percent of average male earnings in the same field of occupation. On average, the female-to-male earnings ratio declined in low-paying occupations such as cashiers (93 percent), cooks (91 percent), food preparation (93 percent) and hand packaging (101 percent). Contrary to the popular perception, female earnings in the field of computer systems management and legal industry represented 91 percent of average male earnings while the highest ratio in high-paying occupations was recorded in pharmaceutical industry (92 percent).

Indeed, there is a persistent and historically lowest male-female earnings gap. But, as the labor economic theory of human capital predicts, the gender pay difference reflects different cognitive abilities and preferences of occupational selection considering the degree of risk-taking and payoff uncertainty. Even the international test scores (link) confirmed that advantage of female cognitive abilities comprehends in verbal reasoning and reading skills (link) while the cognitive abilities of male are more inclined towards the use of computer technology (link) and mathematics (link).

Even in a cross-country perspective, the gender wage differential persists. The gap, defined as the female-male ratio, ranges from 0.9 in France to 0.7 in Canada. The gender wage differential is a cross section of major economies is shown in the table below.

The Gender Earnings Gap Across Countries

Source: F.D Blau & L.M Kahn, Gender Differences in Pay, 2000

The set of different institutional characteristics of labor market in different countries could easily complement the productivity growth rates as to explain the evolution of wage differential across countries. Even though wage rates are primarily determined by the productivity growth, the existence of collective bargaining schemes and rigid labor market mechanism determining wage rate and total compensation can add significantly to the enforcement of particular labor market policies affecting gender bias in wage determination. In the United States and other advanced countries, the main cause of the wider gender earnings gap is a significant gap between college education premium and high school premium. In addition, reductions in personal income tax rates furthermore increase the rewards to college education relative to the education levels of high school or less - which, by the empirical evidence, seems to be the main determinant of earnings gap in the labor market of advanced countries.

Wednesday, September 15, 2010

Recently, the Organization of Petroleum Exporting Countries (OPEC) celebrated its 50th anniversary (link). The organization was founded in 1960 with the purpose of regulating world's oil prices and controlling the supplies of oil. Currently, OPEC controls 80 percent of world's proven oil reserves and its 12 member states oil production capacity accounts for 40 percent of world's total oil production.

As a profit-maximizing monopolist, OPEC is faced with a downward sloping demand curve and upward sloping marginal cost curve which represents the market supply curve of the orgaization's 12 member states. As a profit-maximizing agent, OPEC countries equate marginal cost of production and marginal revenue from oil supplies and thus extract the entire consumer surplus from oil importing countries such as the United States, Japan and the European Union. There are several plausible explanation of OPEC's monopoly power in the world oil market. First, oil is a good with no close substitutes. Thus, the price elasticity of oil demand curve is significantly price inelastic. The average empirical estimate of the world price elasticity of demand for oil is -0.4, suggesting that a 10 percent increase in the price of oil would, on average, reduce the market demand for oil by 4 percent, ceteris paribus.

The relationship between the total revenue of the monopolist and the elasticity of demand suggests that the unit elasticity of demand is the revenue-maximizing point elasticity of demand for the monopoly firm such as OPEC. As the graph shows, OPEC's price spikes occured mostly during external shocks such as the 1973 oil shocks, Arab-Israeli war and the recent financial crisis. The spikes in the world price of oil reflected the pure logic of OPEC's cartel. By pushing the price upward, OPEC countries realized that, in the short run, the price elasticity of demand for oil is even more inelastic, thus reducing the consumer surplus of oil importing countries while expanding the producer surplus of OPEC member states.

The strategic behavior of OPEC mostly depends on the nature of external shocks affecting the production capacity and reserves of world's oil supplies. During political conflicts, the short-run demand for oil spiked and, therefore, the price elasticity of demand for oil decreased, increasing OPEC's short run producer surplus. Thereupon, OPEC member states set oil production quotas which exactly reflected the organization's intention to extract the entire consumer surplus from oil importing countries. Also, during the pre-2008 economic boom, the economic growth in emerging markets further inflated the world price of oil since the OPEC's short run production capacity outpaced the quotas set by the organization. But during the recent financial crisis, the short-run response of OPEC has been the reduction of per barrel oil price as an strategic step towards maintain the stability of market demand for oil. During the recent crisis, personal consumption and incomes have fallen substantially and therefore, assuming the positive income elasticity of demand for oil, the world demand for oil decreased considerably. The change in the aggregate consumption of oil has led to relatively more price elastic demand for oil. Partly, the increase in the price elasticity of oil is explained by the technological innovation and market access to long-run substitutes of oil such as fuel-efficient and electric vehicles and electric cars.

The technological development of fuel-efficient vehicles has decreased the monopoly power of OPEC by increasing the price elasticity of demand for oil due to the availibility of closer substitutes. In the follow-up of the financial crisis, the OPEC set the per barrel price of oil at $75. Given the downward sloping market demand curve, the short-run oil consumption increased and OPEC thus raised the relative price of oil's substitutes since it acknowledged the switching costs of changing the consumption of durable goods which complement the consumption of oil. What OPEC did is that it attempted to establish the short-run price elasticity of oil close to unity and, thereby, effectively increase the total revenue of the organization's member states. However, if in the long run, the market demand for oil was elastic, the net effect of increasing the price of oil, would incidentally fall on the burden of OPEC producers. Therefore, relatively price inelastic demand and price elastic oil supply is the main source of OPEC's monopoly power in the world oil market.

The rationale behind the cartelled market organization of oil supply is the stability of demand for oil across the world. Could OPEC's monopoly power, in effect, be broken if one country would set asymmetric prices on the global oil market. The desire of OPEC member states to fully collude in the cartel is the well-known phenomena from industrial organization known as the trigger strategy. According to trigger strategy, a member of the cartel is likely to divert from the cartel's strategy only if long-term gains outpace short-term losses of acting in accordance with the cartel's strategic behavior. In purely theoretical terms, if Nash equlibrium exists in the long-term benefits of cooperation, the diversion from cartel's strategic behavior, will not be feasible.

Even though some OPEC member states face asymmetric market demand curves in the short run, the stability of world oil demand embodied in the relatively price inelastic oil demand decrease the feasibility of defection from the cartel's strategic targets, discounted benefits from the collusion far outpace potential short-term losses.

Friday, September 10, 2010

In 2009, the median weekly earnings of workers with bachelor's degrees were $1,137. This amount is 1.8 times the average amount earned by those with only a high school diploma, and 2.5 times the earnings of high school dropouts (link).

According to some preliminary estimates (link), China's trade balance is on the course for a significant surplus this year. IMF's annual forecast of current account balance predicted China's trade surplus at $334 billion in 2010 or roughly 6.2 percent of China's GDP. The IMF's medium-term forecast suggests a growing trade surplus by 2015 when the surplus is estimated at a little more than 8 percent of GDP.

Recently, Dani Rodrik questioned (link) the persistence of China's mercantilism based on persistently low exchange rate. The partial fixation of the exchange rate then stimulates export-led growth model and, consequently, results in a large trade surplus which translates into foreign exchange reserves, thus enabling China's central bank to foster exchange rate intervention to defended the targeted yuan exchange rate against the U.S dollar. The implications of China's growth model extend beyond the scope of effects on country's economic growth, investment and current account balance. China's export-led growth model has tremendously affected the macroeconomic performance of developing nations. The exports of developing nations in the European, Japanese and U.S markets basically substitute, not complement, China's exports to the markets of advanced countries. The persistent lack of the appreciation of renmimbi thus forced the economic policymakers of other developing nations to either adopt the same model of exchange rate intervention or lose the export share in developing countries. This intuition is underlined by the theoretical and empirical support.

In 2007, Hausmann, Hwang and Rodrik demonstated (link) that the pattern of specialization by developing countries predicts the subsequent economic growth, suggesting that the share of exports in advanced countries is highly positively correlated with the rates of economic growth. If China shifted the main source of economic growth from export-led model to domestic consumption, the renmimbi would have to appreciate considerably. Contrary to the assertion that China's exchange rate undervaluation hampers the economic growth, industrialization and development prospects of developing nations, the OECD recently stated that developing countries would be hurt significantly if the renmimbi exchange rate were allowed to appreciate. There is also an empirical support for the particular assertion. The OECD recently estimated (link) that, if China's output grew by 1 percentage point, the output of developing countries would decrease by 0.3 percentage point.

The empirics supports the argument I mentioned earlier - China's exchange rate misalignment inevitably hinders the growth prospects and industrialization of developing countries. The essential question in the course of economic development is what is the best model of growth for developing countries to boost industrialization and development frontiers.

One possibility is the so called surplus model. Historically, growth models of low-income countries were primarily based on exporting natural resources to the rest of the world. Countries such as oil-rich gulf states, Botswana and Argentina became wealthy. Such growth model heavily depends on export demand in other countries. The most notable failure of this growth model is that it doesn't encourage the diversification of economic activity. Thus, countries such as Libya have sustained relatively high levels of GDP but, at the same time, rather depressing domestic indicators. For instance, Libya's GDP per capita is at almost the same level as Chile's GDP per capita, but Libya's unemployment rate is 30 percent - almost three times the average unemployment rate in countries with the same level of GDP per capita. When foreign demand deteriorates, these countries experience the Dutch disease - an overheating economic activity and overvalued exchange rates that discourage investment, entrepreneurship and typically result in higher unemployment rates.

Industrialization and economic development mostly depend on domestic structural change based on the adopting the institutions of macroeconomic stabilization and the rule of law. China's exchange rate policy of renmimbi undervaluation is a failed temporary growth model that is set on the unsustainable course. Without shifting the major engine of growth from export-boosting exchange rate undervaluation to consumption-based growth, Chinese economy will no longer be able to sustain high productivity growth rates. Letting the renmimbi appreciate by free floating could significantly boost the potential for institutional change in China and other developing nations. Therefore, the systemic abuse of macroeconomic policy by exchange rate undervaluation would no longer be feasible and the costs of failed exchange rate regime for developing countries would diminish substantially.

Monday, September 06, 2010

Carlos Pereira of the Brookings Institution (link) has reviewed the dismal productivity growth and the consequent macroeconomic indicators in Brazil in the last decade.

"Although there are several expenditures in this category, the one that stands out high above all others is outlays for social security and pensions. Practically one-third of the federal budget is devoted to these expenditures, whereas expenditures in investments were less than 6 percent in 2003. Pensions in Brazil since the 1988 constitution have been notably generous, especially in the civil service. A new group of non-contributing rural pensions was added, contributing to systematic deficits. With about 11.7 percent of GDP, Brazil has one of the highest social security expenditures in the world, especially considering that the Brazilian population is much younger than that of most countries with similar levels of expenditure."

Sunday, September 05, 2010

A recent paper by Jennifer Hunt (link) finds that the increase in foreign-born graduates strongly contributes to the innovation in the United States:

"In this paper I have demonstrated the important boost to innovation per capita provided by skilled immigration to the United States in 1950-2000. A calculation of the effect of immigration in the 1990-2000 period puts the magnitudes of the effects in context.

The 1990-2000 increase from 2.2% to 3.5% in the share of the population composed of immigrant college graduates increased patenting by at least 81:3 = 10:4%, and perhaps by as much as 18%. The increase in the share of post-college immigrants from 0.9% to 1.6% increased patenting by at least 10.5% and perhaps by as much as 24%. The increase from 0.30% to 0.55% in the share of workers who are immigrant scientists and engineers increased patenting by at least 13% but probably by less than 23%.

While I find evidence for the crowding-out of natives in the short run, in the long run there is evidence for the reverse: that skilled natives are attracted to states or occupations with skilled immigrants. The results hint that skilled immigrants innovate more than their native counterparts, especially if they are scientists or engineers. If correct, the result could reflect higher education of immigrants within skill categories, or positive selection of immigrants in terms of ability to innovate. However, the effect of natives is not as well identified econometrically as the effect of immigrants."

In the recent edition of Yale Economic Review (link), Ed Glaeser, Matthew Kahn and Jordan Rappaport ponder one of the most difficult and challenging puzzles of urban economics:

"The 2000 U.S. Census shows that the average poverty rate in American cities drops signiﬁcantly, from about 20% to 7.5%, as you move from the CBD of a city to its suburbs. How can we tell that this connection between city residence and poverty comes from treatment – that is, cities make people poor – rather than from selection, where the poor disproportionately move to central cities? Here, the data support selection: although ghettos may exacerbate poverty, poor people move disproportionately to the center of the cit- ies, either when switching homes or moving to a new metropolitan area... Given the high proportion of the urban poor who are Black, one might think that inner-city poverty is really just another example of the segregation of minorities. However, [the authors] found that poor Whites have roughly the same central city - suburb poverty gap as Blacks, so it is unlikely that race plays an important role in the centralization of the poor."

An intriguing empirical finding from the institutional perspective of economic development from Daron Acemoglu, Simon Johnson and James A. Robinson (link):

"Botswana has had the highest rate of per capita growth of any country in the world in the last 35 years. This occurred despite adverse initial conditions, including minimal investment during the colonial period and high inequality. Botswana achieved this rapid development by following orthodox economic policies. How Botswana sustained these policies is a puzzle because typically in Africa, ‘good economics’ has proved not to be politically feasible. In this Paper we suggest that good policies were chosen in Botswana because good institutions, which we refer to as institutions of private property, were in place...

Why did institutions of private property arise in Botswana, but not other African nations? We conjecture that the following factors were important. First, Botswana possessed relatively inclusive pre-colonial institutions, placing constraints on political elites. Second, the effect of British colonialism on Botswana was minimal, and did not destroy these institutions. Third, following independence, maintaining and strengthening institutions of private property were in the economic interests of the elite. Fourth, Botswana is very rich in diamonds, which created enough rents that no group wanted to challenge the status quo at the expense of ‘rocking the boat’. Finally, we emphasize that this situation was reinforced by a number of critical decisions made by the post-independence leaders, particularly Presidents Khama and Masire."

Friday, September 03, 2010

Dani Rodrik argues (link) that political dictatorship is damaging to economic growth since democracies not only outperformed countries with flawed political regimes in the dynamics of economic growth but also in terms of greater civil, economic and political liberties and investment in education that help enforce better public policies and yield better prospects of economic development.

"Democracies not only out-perform dictatorships when it comes to long-term economic growth, but also outdo them in several other important respects. They provide much greater economic stability, measured by the ups and downs of the business cycle. They are better at adjusting to external economic shocks (such as terms-of-trade declines or sudden stops in capital inflows). They generate more investment in human capital – health and education. And they produce more equitable societies."